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Charles Lane: The ethanol mandate's coming car wreck

THERE ARE TWO iron laws of energy policy in the United States. Iron Law No. 1: A higher federal excise tax on fuel would efficiently reduce gasoline consumption and its negative side effects (air pollution, traffic congestion, carbon emissions, dependence on foreign oil).

Iron Law No. 2: Although economically rational, gas taxes are politically unpopular, so Congress will go to almost any length to avoid raising them, even if that means resorting to far less transparent policies.

Hence we have Corporate Average Fuel Economy (CAFE) standards for cars, which takes a Ph.D. in mathematics to comprehend — and increases the price of a new automobile by hundreds of dollars.

Hence, too, we have elaborate government mandates and subsidies for blending ethanol into gasoline, which cause farmers to divert land, water and capital into growing corn and other crops for fuel rather than food.

True, ethanol policy became somewhat less irrational at the end of 2011, when Congress finally allowed a $6 billion annual tax credit to expire.

But a 2007 federal law mandating ever-greater ethanol consumption remains on the books, and it is starting to create the economic equivalent of a multi-car freeway pileup.

Known as the Renewable Fuel Standard (RFS), the law requires refiners to blend 36 billion gallons of ethanol and the like into transportation fuels by 2022.

Alas, like many previous attempts at central planning, the RFS has run afoul of changing realities in the marketplace — specifically, a seemingly permanent leveling-off of motor-fuel consumption because of changing driving habits, the sluggish U.S. economy and CAFE standards, among other factors.

As it happens, gasoline consumption hit an all-time high of nearly 9.1 million barrels a day in the year that Congress passed — and President George W. Bush signed — the RFS. It has since dropped by half a million barrels a day, and the Energy Department forecasts that the downward trend will continue through 2040.

The result is that the fuel industry is about to hit a "blend wall." The 2007 standard calls for producers to blend more ethanol into gasoline than the market can absorb at the current standard rate of 10 percent per gallon.

Producers can still meet their regulatory obligations by buying obscure, tradable credits known as Renewable Identification Numbers, or RINs.

Formerly a few cents per gallon, the price of a RIN recently reached $1.40 as businesses covered by the RFS — and speculators — snapped them up in anticipation of the "blend wall."

Industry experts expect companies to pass the cost along to consumers, to the tune of at least 19 cents per gallon at the pump, according to a study by the Energy Policy Research Foundation. The total cost would reach $25 billion a year.

Last week, the Environmental Protection Agency bowed to these realities, announcing that it would use its waiver authority to reduce the ethanol mandates for 2014. That provides industry a reprieve of sorts; it certainly may spare politicians of both parties the trouble of running for office in the middle of a government-induced spike in gas prices.

Still, the EPA's action is far from a permanent fix. The 2007 law allows the agency to grant such waivers for only a year at a time. Oh, and here's another perversity: Eliminating the "blend wall" would destroy the value of RINs people have bought to cope with it.

Meanwhile, a central purpose of the 2007 law — energy "independence" — is well on its way to being met through other means, chiefly a boom in oil production that Congress and the Bush administration never anticipated. The Energy Department projected earlier this year that the United States will be able to supply two-thirds of its petroleum needs through the next three decades.

The ethanol industry grouses that the whole mess with the RFS and RINs could have been avoided but for the refusal of "Big Oil" to invest in the production and distribution of gasoline containing 15 percent ethanol, or 85 percent ethanol "flex fuel."

I suppose they have a point — if you think it's plausible that any industry would have willingly invested billions of dollars to help sell a competing product.

This is the sort of argument between rent-seekers that occurs when government tries to meet public-policy objectives through complex subsidies and mandates — rather than by setting broad incentives and letting market participants respond to them.

A gas-tax increase would clean up the environment and cut oil imports, with the revenue going to reduce the federal deficit — as opposed to lining the pockets of various well-connected industries. Perish the thought.